愛德華生命科學 (EW) 2013 Q1 法說會逐字稿

Greetings and welcome to the Edwards Lifesciences Corporation first-quarter 2013 earnings conference call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Erickson, Vice President Investor Relations. Thank you, Mr. Erickson. You may begin.

Welcome and thank you for joining us today. Just after the close of regular trading we released our first-quarter 2013 financial results. During today's call we will discuss the results included in the press release and accompanying financial schedules and then use the remaining time for Q and A. Our presenters on today's call are Mike Mussallem, Chairman and CEO; and Tom Abate, CFO.

Before I turn the call over to Mike, I would like to remind you that during today's call we will be making forward-looking statements that are based on estimates, assumptions, and projections. These statements include but are not limited to our expectations regarding sales and sales growth, gross profit margin, earnings per share, SG&A, R&D, taxes, free cash flow, diluted shares outstanding, and foreign currency impacts.

These statements also include our current expectations for the timing, status, and expected outcomes of our clinical trials, regulatory submissions and approvals and reimbursement conditions, as well as expectations regarding market opportunities, the US launch of SAPIEN, and other new product introductions, patent matters, and our pipeline. These statements speak only as of the date on which they are made, and we do not undertake any obligation to update them after today.

Although we believe them to be reasonable, these statements involve risks and uncertainties that could cause actual results or experiences to differ materially from the forward-looking statements. Information concerning factors that could cause these differences may be found in our press release, our annual report on Form 10-K for the year ended December 31, 2012, and our other SEC filings which are available on our website at Edwards.com.

Also a quick reminder that when we use the terms underlying, excluding the impact of foreign exchange, and excluding special items, we are referring to non-GAAP financial measures. Otherwise, we are referring to our GAAP results. Additional information about our use of non-GAAP measures is included in today's press release. And now I will turn the call over to Mike Mussallem. Mike?

Thank you, David. Our global THV sales growth of 40% was driven by the continued adoption in the US. Our clinical results continue to be very positive, and we're making good progress on our pipeline of new products designed to strengthen our leadership position. Yet global sales this quarter across all product lines were below our expectations, so we're lowering our 2013 guidance, primarily to reflect the slower start to the year and an updated foreign exchange impact.

Now turning to the quarterly results. Reported sales grew 8% to $497 million. Sales growth excluding the impact of foreign exchange was 10%. The favorable healthcare utilization trends we saw in Q4 did not continue in Q1. Additionally, selling days were lower this quarter and were most pronounced in Japan, where we experienced the four-day difference. In Japan, excuse me, in Europe, sales grew 4%, despite a weakened economic climate. In the US, total sales grew 22%.

In Transcatheter Heart Valves, first-quarter sales of $170 million were driven by the ongoing US launch of SAPIEN. In the US, THV sales were $83 million for the quarter, which included clinical sales of $7 million and net stocking sales of $6 million. Stocking orders were less than expected as we trained fewer TA sites than anticipated. While we estimated procedures nearly tripled from a year ago and were 20% higher than the fourth quarter, they were below our expectations.

Today, more than 225 sites in the US offer SAPIEN to their patients. Of these sites, 180 have been trained on the transapical approach. While interest among heart teams for this important delivery option remains high, approximately 20 sites have postponed their TA training. We believe the backlog of TA patients who are awaiting therapy has now been addressed.

Overall capacity is still increasing while some sites report that they currently have capacity constraints. Importantly, clinicians have continued to maintain very high procedural success rates overall, even while adopting the new TA approach. As a reminder, we'll continue to report procedural growth and the impact of net stocking in 2013, and in 2014 we expect reported sales to begin tracking procedures performed.

Overall, we believe the reimbursement for TAVR is designed to be fair on a national basis, yet regional payments are highly variable. There are some hospitals that question the profitability of this procedure based on their regional reimbursement, as well as how they account for other related services and the allocation of overhead. We continue to engage with these centers to share best practices, with a focus on reducing lengths of stay, as well as lowering procedure-related costs and complications.

Outside the US, THV sales grew 8% in the quarter, or 7% excluding the impact of foreign exchange. Our units grew approximately 10% with pricing declined slightly year over year, similar to last quarter. Growth was strongest again in Germany, while ongoing austerity measures resulted in negative growth in southern Europe. Our transfemoral units outside the US grew significantly, while non-transfemoral units declined again this quarter driven by a TF first approach and the impact of competitive transapical products.

Last month at the ACC meeting there were a number of presentations and live cases featuring our SAPIEN technology, including two important late-breaking data sets. First, the results of our cohort A of the PARTNER trial continue to demonstrate comparable outcomes between the treatment with Edwards SAPIEN transcatheter heart valve and open heart surgery for patients at three years. These data indicated mortality and stroke rates were similar at three years, further strengthening the evidence supporting the use of TAVR in high-risk patients.

Second, preliminary results from cohort B of PARTNER II trial demonstrated similar one-year outcomes in mortality and major clinical events between SAPIEN and XT, yet fewer vascular events with the lower-profile XT valve. While not directly comparable, we were most pleased to see improved outcomes in both SAPIEN and SAPIEN XT patients as compared with earlier trials.

Now looking at our transcatheter product pipeline. We're still enrolling patients in cohort A, the surgical arm of our US PARTNER II clinical study, which is evaluating our SAPIEN XT technology. We continue to expect to complete enrollment around mid-year. Additionally, we anticipate submitting our PMA for cohort B of the PARTNER II trial next week, which we anticipate leads to a US approval of SAPIEN XT next year.

We continue to enroll patients for the CE Mark trial of our advanced SAPIEN III valve, which is delivered through a 14-French e-Sheath and designed to reduce paravalvular leak. This keeps us on track to receive a CE Mark and launch this product in Europe by year end. In Europe, we're continuing to enroll in our self-expanding CENTERA valve trial and clinical experience with this novel valve will be discussed at the EuroPCR next month. Also at PCR, we anticipate a number of important presentations, including early data from our pro TAVI study, which is evaluating the causes of stroke and our umbrella device, as well as updates from the source XT registry.

In Japan, we continue to expect to receive both regulatory approval and reimbursement for SAPIEN XT by year end which positions us to have the first commercially available transcatheter valve in that country.

Recently the first implantations of the new delivery system for our HELIO aortic insufficiency technology were performed. This new system uses a completely transfemoral approach, making it an interventional procedure. As you may recall, earlier feasibility work with HELIO required both transfemoral and transapical access. We are continuing our feasibility work with this system and expect additional clinical experience to be discussed at EuroPCR.

With respect to our THV patent litigation with CoreValve, we collected $84 million from Medtronic in the quarter, which reflected damages for willful infringement and interest through early 2010. Later this year we expect the Delaware District Court to address the amount of damages due to Edwards from 2010 forward, as well as our request for an injunction.

The patent office granted our request for a second interim extension of the Andersen patent, which now extends its life to May of 2014. We expect the final decision on the patent extension to be issued during the first half of next year. And in Germany, the trial for the first of three new THV patent infringement cases against Medtronic CoreValve is scheduled for later this month.

In summary, US THV sales are below our expectations, which we believe is primarily the result of evolving economics for some hospitals and still-developing capacity of both hospitals and their heart teams. As a result, we're lowering our 2013 guidance, primarily to reflect our first quarter experience. We now expect global 2013 transcatheter heart valve sales to grow 25% to 30% on an underlying basis. This would result in sales of $670 million to $750 million, which includes $350 million to $400 million of sales in the US.

In light of the reduced guidance, I would like to remind you how we view the US transcatheter valve opportunity. We are rapidly learning about the factors that influence adoption, are continuing, and we're continuing to work closely with sites. The untreated aortic stenosis population remains large, and we believe a less invasive catheter-based approach remains attractive to patients and clinicians.

This is especially true in light of the growing body of clinical evidence and the increasing demand in Europe even six years after introduction. For these reasons, our estimate of the size of the US transcatheter valve opportunity for the longer term remains unchanged.

Now turning to the Surgical Heart Valve Therapy product group, reported sales declined 3% over last year to $198 million. Excluding the impact of foreign exchange, sales were essentially unchanged compared to the prior year. This quarter's growth rate reflects a tougher comparison and was further tempered by the earlier impacts from a competitor's introduction in Japan. Globally, our pricing remains stable.

Late in the quarter we received approval to sell our Magna Ease platform in China, which complements the approval of our PeriMap valve received late last year. This quarter, INTUITY is starting to impact our sales growth rate. We continue to make progress on our key milestones with this minimally invasive valve system. In Europe, our trials to assess the economics and benefits of INTUITY are progressing as planned, and we continue to expect a CE Mark on INTUITY Elite in the third quarter. Elite is our next-generation platform with a lower profile designed to further enable small incisions.

In the US, we recently received approval from the FDA to include INTUITY Elite in our ongoing transform IDE trial and enrollment is on track. We continue to enroll patients in our commence US IDE trial. This trial is studying the GLX tissue on our Magna Ease platform which now includes both our market-leading aortic and mitral valves. We now expect underlying sales growth in the Surgical Heart Valve Therapy product group to be between 2% and 5% in 2013, aided by the commercialization of INTUITY but tempered by the slower-than-expected start to the year.

Turning to the Critical Care product group, total sales of $129 million for the quarter declined 4% over last year or remained flat, excluding the impact of foreign exchange. Growth in advanced monitoring products in Europe and the US was offset by our reduction of distributor inventory in China and an expected sales decline related to the ongoing exit of our access product line.

The integration of BMI is going well and the incorporation of our non-invasive monitoring technology into our EV1000 platform is still on track. While this technology has long-term potential, sales were negligible in the first quarter and will remain moderate until 2014, when we plan to introduce the integrated platform.

We remain enthusiastic about the significant opportunity represented by our GlucoClear system and expect 2013 to be a pivotal year as we complete additional studies in Europe and attain greater clarity on the pathway toward US approval. We're on track to meet our key milestones and are encouraged by the early experience.

Based on the lower sales this quarter, primarily resulting from our decision to reduce distributor inventories in China, we now expect full-year 2013 underlying sales growth of 2% to 4% in the Critical Care product group, driven by continued growth in our advanced monitoring products. And now I will turn the call over to Tom.

Thank you, Mike. This quarter, on a GAAP basis, we achieved diluted EPS of $1.24, which benefited from the Medtronic payment and the 2012 R&D tax credit. Excluding these special items, our non-GAAP diluted EPS was $0.72, or 36% growth over last year. Also during the quarter, we repurchased 1.3 million shares of our stock. As Mike mentioned, we have reduced our 2013 projected sales, resulting in full-year estimated diluted EPS, excluding special items, of between $3 and $3.10.

For the quarter, our gross profit margin was 75.4%, compared to 72.3% in the same period last year. This improvement was driven by a more profitable product mix as THV sales continue to grow, and a favorable impact from FX. For full-year 2013, excluding special items, our guidance remains between 74% and 76%.

First-quarter SG&A expenses were $185 million, or 37.3% of sales, an increase of 4.5% over the prior year. This increase was driven primarily by the US medical device tax, and US transcatheter expenses. Given our revised sales projections, we now expect SG&A as a percentage of sales for the full year to be similar to the current rate.

We continue to aggressively invest in R&D, and spending in the quarter grew 16% to $80 million, or 16% of sales. This increase was primarily the result of additional investments in a number of active heart valve clinical studies. We expect R&D investments to remain at this current ratio to sales for the remainder of the year.

As previously announced, in the first quarter we received $84 million from Medtronic related to the damages award for infringement of the US Andersen THV patent. Also, as required by GAAP, this quarter we recorded $8.4 million benefit from the 2012 federal R&D tax credit. For comparison purposes, in our non-GAAP results, we already reflected the benefit of the credit in the fourth quarter 2012, and, therefore, excluded it from this quarter. These two special items increased diluted EPS this quarter by $0.52.

Our reported tax rate for the quarter was 24.6%. Excluding the impact from our two special items, our tax rate was 22.4%. We now expect our full-year tax rate, excluding special items, to be at the low end of our previous 23% to 24% range.

FX rates negatively impacted first quarter sales by $8 million compared to the prior year. Compared to our recent guidance, FX rates negatively impacted EPS by $0.02. Looking forward, with the changes in the yen FX rates, we now expect a $50 million negative impact to full-year sales compared to last year, which compares to the $15 million negative impact we provided at our investor conference in December.

Free cash flow generated during the quarter was $64 million. We define this as cash flow from operating activities of $87 million, less capital spending of $23 million. Excluding the impact of the payment from Medtronic, our free cash flow was $7 million. For 2013, excluding special items, we now expect free cash flow to be between $270 million and $310 million.

During the quarter we spent approximately $108 million on share repurchases. For modeling purposes, we now project fully diluted shares outstanding to be approximately 116 million in 2013, which is 2 million shares lower than our December guidance. At the end of the quarter, approximately $140 million was available under our existing share repurchase authorization.

Turning to our balance sheet, at the end of the quarter, we had total cash and cash equivalents and short-term investments of $558 million. Total debt was $193 million. Our DSO at the end of the quarter was 56 days, a two-day reduction from the prior quarter. Inventory turns were 1.7, a small decrease from the prior quarter.

Turning to our sales guidance for 2013, given the lower utilization we experienced in Q1, we now expect full-year total sales of $2.0 billion to $2.1 billion, which represents an approximate 10% underlying growth rate. This includes a $35 million larger penalty from foreign exchange compared to the guidance provided in December. For Surgical Heart Valve Therapy product group, we now expect sales of $770 million to $810 million. In Transcatheter Heart Valves, we now expect sales of $670 million to $750 million, and in the Critical Care product group, we now expect the sales of $530 million to $570 million.

Excluding special items, we now expect full-year 2013 diluted EPS of $3 to $3.10, for a growth rate of approximately 13%. For the second quarter, we project total sales of $500 million to $530 million, and second-quarter diluted EPS, excluding special items, to be between $0.75 and $0.79. With that, I will hand it back over to Mike.

Thanks, Tom. We remain committed to our high level of investment in our pipeline of new products for the clinicians we serve and the patients they treat. We believe this enables us to aggressively develop our innovative product lines, driving long-term growth and extending our focused leadership position in structural heart therapies and critical care technologies. With that, I'll turn the call back over to David.

Thank you, Mike. In order to allow broad participation in the Q and A, we ask that you please limit the number of questions. If you have additional questions, please re-enter the queue and we'll answer as many as we can during the rest of our time. Operator, we're ready for questions, please.

Thank you.

(Operator Instructions)

Jason Mills, Canaccord Genuity.

Mike, you intentionally in the press release mentioned that your US market opportunity expectations hadn't changed. Obviously recognizing that's somewhat of a debate out here on the street, can you give us a bit more granularity as it relates to how you are sizing it, maybe a bit more color as it relates to the current target population as you see it relative to the current technology and how that target population expands, or does whatever you expect it to do, as new technology comes through the FDA? Then I have one follow-up.

Sure, Jason. I'll speak to the US market because that's really where we changed the estimate for the year. We would imagine it would cause people to wonder if we thought the opportunity was smaller. Although we thought here in the near term here that there may be some capacity constraints, and there may be some economic conditions for some sites that might be limiting in the near term, our expectation about the treatment opportunity hasn't changed at all. We continue to be bullish. Our models are driven by the prevalence. We believe the prevalence of this disease has not changed in any way. There's 260,000 patients with severe symptomatic aortic stenosis that are out there, and only a quarter of those patients are treated.

And we believe that as this technology continues to prove itself, and we're delighted with how it's demonstrated its impact on a long-term basis, that it is going to encourage these patients that are untreated for a variety of reasons to come off and to gain treatment, particularly since you have this attractive catheter-based option. We think there's a component of that, which is simply accounts that are still on a learning curve that are coming up, Jason. There's accounts that are developing their referral networks, still training general cardiologists, clinicians and their patients. So there's a fair amount of that that's still going on right now. And we think as the technology improves, and as the clinicians improve their technique, that this only grows.

Thanks, Mike. I would like to follow-up on that. And my second question, I will just ask, and get back in queue, the follow-up would be, I think in the past you have identified the US market broadly speaking as about 100,000 patients. Relative to the current SAPIEN technology, what percentage of that with the current approvals do you think you're addressing? And the follow-up question is given the evolving economics that you discussed, Mike, is there a contemplation in the near term that perhaps there would be some pricing considerations you would be giving to various hospitals in various geographies who obviously are in some sort of smaller metropolitan areas? We're obviously hearing that they're having a little bit more trouble with economics than the larger ones. Could you talk about your pricing strategies near term? Thanks for taking the question.

Yes, just to be specific, I don't know where the 100,000 number came from, Jason. When we built this, we built this off the 260,000. We feel like with a transfemoral and a transapical approach that we still have the ability to treat most patients. The transapical became very important, particularly with the large French size of SAPIEN. So, no, we don't see the market really limited from that perspective.

In terms of pricing, you all know how expensive this is to be able to bring this technology to the market and to demonstrate all the clinical evidence that we generate and we think our pricing continues to be fair. Of course, we'll reward high-volume centers with more attractive pricing, but I wouldn't expect any substantial changes in our pricing picture, Jason.

Thanks for the color.

David Roman, Goldman Sachs.

Thank you and good evening. I want to just start with going through maybe just at the high level, if you could provide some perspective on what's really changed in your thinking about 2013? And I understand there are some macroeconomic factors, but as I look at the original guidance on some of these segments, whether it's the surgical heart valve business, that business was obviously very pressured in 2012. The guidance that you originally provided for 2013 assumed a turnaround. What I'm really wondering, as you look at the guidance that you provided today, how much are you banking on things getting better versus taking what you now see as reality and extrapolating that forward?

Sure. I'm happy to get into it, David. Out of the change that we provided in our sales guidance, remember that a big piece of that is foreign exchange. So you could sort of set that aside. That was either $35 million from the investor conference or $30 million since the last time we talked. Separate from that, there was a component of that, that was related to Critical Care. The component that wasn't FX there was largely related to this change in our inventory in China.

In heart valves, the change, in addition to what we already talked about that's climate related, was also related to this competitor in Japan that launched a little bit early. And the biggest single change is in US THV. That change in guidance was around $40 million. If we say that about a quarter of that already happened in the first quarter, David, this is a reflection that we're off to a slower start. And so that would be the key changes, aside from the macro ones, that we're explaining.

Okay. And then, maybe just to follow up on the US business, I was a little bit surprised to hear the commentary regarding 20 sites canceling their TA training. My initial read on the net stocking numbers that you might have been transitioning to, to consignment faster, but it sounds like the dynamic is that you blew through the bolus of patients in TA and now sort of taking a little bit longer to get sites up and running. Is there any more detail you can provide us on why these sites are canceling and what you think it is going to take to get them to, A, go through training, and then, B, get up the curve in doing procedures?

Sure, David. Let me get into it. On the 20, I don't know that I would say they canceled, but we would say that they postponed. And we didn't expect 20 sites to postpone. There were a variety of reasons for why they did. Some would say, gee, they're waiting for their hybrid OR to be completed. Some might say that the surgical teams for one reason or another weren't ready to be trained. Some people cited waiting for TAO before they actually jumped into it. So there are a variety of reasons, but those 20 sites would have probably generated something in the neighborhood of $5 million or more of stocking sales which we did not realize in the quarter.

Understood. And then last, just on the R&D spending, it does look like you are continuing to spend at a very high level. If you're willing to provide any further detail on what's in those numbers, that would be helpful. And if not, when do you think we can start to see what's sort of beneath the kimono, so to speak there?

As we tried to suggest, the key component of that is we have a lot of heart valve clinical trials going on right now. And I tried to tick through an awful lot of those in the course of our commentary. Those consume more than 50% of the R&D budget for Edwards Lifesciences. We're continuing to follow PARTNER patients. You've got PARTNER II and you've got the trials that are going on in surgical heart valves. You've got some of the other things that are related to registries. So when you add it up, it's pretty substantial.

Separate from that, we've got the R&D programs that we cited in each of our businesses, and what we have going in advanced technology. So the combination of those are pretty significant. We think that we're excited about the prospects of those investments generating future sales. And so we really have been hesitant to pull back on that and continue to think that, that's a good investment of our funds.

Understood. Thank you very much.

Sure.

Larry Biegelsen, Wells Fargo.

Good evening. Thanks for taking the question. Mike, let me start with a long-term question. You have Japan coming on that should help your growth in 2014. But can you talk about what's going to drive your growth in 2015 and 2016 before we have the PARTNER IIa indication approved? I assume this year the guidance is for 10% underlying growth, but what -- how are you going to maintain that kind of growth beyond -- between 2015 and '16? And then I have one follow-up. Thanks.

I wasn't prepared to actually go through that in detail, but I can take a shot at it just to answer your question, Larry. We think that the SAPIEN technology is going to continue to grow. Those referral patterns and those patients are going to continue to come off the sidelines, and that's going to grow. In Europe, we should be bringing our new lower profile technologies into being, and so SAPIEN III and CENTERA have an opportunity to lift those. In our heart valve area, we have INTUITY that should be hitting its stride and lifting the growth rate of surgical heart valves. We have an opportunity for our non-invasive technology and our glucose to be lifting our growth rates. Within Critical Care, we have MIS products within our CSS product line that should be lifting it. So we think there's -- we think we have a pretty good line up, a pretty good -- it was noted earlier how much we have invested in R&D. We have quite a line up of new things that have an opportunity to lift us.

All right, my second question, Mike, I'm sorry to sound like a broken record, but is there any color you can give us on mitral first in man timing? Thanks.

Well, I would just reiterate what we said at the time of investor conference, that we thought it was likely that we're able to do a first in man in the mitral position this year. And we haven't been deterred on that. So given that it's April, that means that we're that much closer, and we continue to express the same sentiment. This is one that I hesitate to say too much before we know, because we set some pretty high internal hurdles before we go to a first in man. We want to make sure that we check all those boxes and feel comfortable about that before we do it. But we continue to feel excited about the mitral opportunity. It's a big one. It's a big one for the Company. It's a big one for patients. And we're hopeful that this is going to be the year where we have a novel first in man.

Thanks for taking the question.

Sure.

Imron Zafar, Jefferies.

Hi, good afternoon. Thanks a lot for taking my question. Just trying to understand the TAVI guidance cut a little bit better. Can you talk about volume trends that you are seeing in cohort A patients versus cohort B patients and also TA versus TF delivery? Was there under performance in one segment versus the other in these categories?

Yes, one of the things that I tried to note, to the extent that it's helpful, is that if you strip out clinicals and you take out net stocking orders that the actual reorder rate was about 20% higher in Q1 compared to Q4. So it gives you some sense of the ramp. You have to be a little bit careful with the split of TA, TF, because you still have TA that is being bought on stocking orders. There's a little bit more TF purchases than TA this quarter, although they're somewhat similar. But, again, the TA was lifted by the stocking orders.

Also note that you have a very different split outside the US where you have a lower profile SAPIEN XT device. So even though you have the split today, trying to do math on that is difficult. We don't have a great handle on how many -- which patients are inoperable as opposed to high risk. That tends to be a gray area and we don't really have much that we can offer up on that front. I don't know if I answered your question, but I'm happy to take a follow-up.

No, that helps. In terms of the US target centers going forward, I think last quarter you mentioned 200 new centers over the next two years. What's the updated target there? And is there any change in the strategy in terms of focusing more on utilization at existing centers versus more resources on adding these centers?

Yes, we don't have a formal update on the 200 centers to be added over the next two years. It's still a reasonable estimate. I think we inferred that, that would be about 100 this year, 100 next year. I would say the 100 this year is probably at the high end of the estimate. I don't expect it to be above that, but there's still a number of centers that want to get in. There are a few centers, maybe one or two, that have cited economics for not coming in, but for the most part there continues to be strong demand. Was there another part of your question?

Yes, I just wondered if there was any revisiting of the longer term strategy of maybe focusing more on existing centers and driving utilization at those centers versus --

It's a great question. I would say a lot of our growth has continued to come out of existing centers with well developed patterns, and there is a steep learning curve that's going on right now in all centers. There are capacity constraints, and we hear it on all kinds of shapes and sizes. So we hear some that they need to, for example, get another nurse coordinator to do patient screening. We heard from some that they need to get additional days set aside in the cath lab and the ORs. We hear from others that it's time to get a second team up.

So there's a variety of those things going on. Some people building hybrid ORs that aren't finished yet. So there's not one single theme that I can put my finger on that says it is going to relieve the capacity constraints. Our sales teams are engaged heavily with each of their sites trying to help them through their capacity increases.

Okay. Thanks very much.

Sure.

Glenn Novarro, RBC Capital Markets.

Mike, I'm wondering if you can discuss US volumes, US SAPIEN volumes in the quarter. Were they soft throughout the quarter? Did things maybe get better in March? Maybe some color as to how the quarter progressed.

That's a tough one. We know how that went. It was pretty slow start to the quarter, but it's hard for us to say that it was really a steep ramp after that. So January was our softest month, and we saw pretty steady ramp after that, so I don't know if that helps provide any color, Glenn.

That's fine. And then the 20 sites on TA that postponed, should we assume that they come back in the second quarter, and, therefore, we should be modeling a stocking that's closer to $10 million?

We would expect that they would eventually get trained. Whether it be on TA, or even those sites that talk about TAO, our system could potentially -- in the short answer, yes, it would be trained. Remember that, even though we expect to have those stocking orders come in, Glenn, there is going to be some offset for consignment. I think when we tried to provide some help on this, we thought that net stocking would be somewhat of a lift in the first part of the year, and not so much in the back part, but as the business gets bigger, net stocking is going to start to become a smaller and smaller part of total sales. And so it will have a diminishing impact.

But if these 20 sites do get trained this quarter, we could get a lift from stocking in 2Q and then a slow ramp thereafter. Is that a fair modeling assumption?

Well, yes, I do think that's true, we should get a lift from that, but, again, I'm not in a position to predict exactly how the net stocking is going to turn out, Glenn.

Okay. And then one last quick question. Of the partner sites, and we talked to the partner sites, they're maxed out, they're doing 8 to 10 cases a week, and clearly where the slowing is, is occurring, is in the non-partner sites and you talked about how some of these sites are having a hard time developing referral patterns. Is there anything Edwards can do to help these sites develop these referral patterns faster so that the ramp can reaccelerate?

Yes, I didn't put a big emphasis on referral patterns. I think that's one that's going to have an impact on a long-term basis. I don't know how much of an impact it's really having in the near term, but to be specifically -- or to speak specifically to your question, there are several things that we're doing that we think can have long-term impact.

One we mentioned before is we have engaged with the American College of Cardiology on the championing care initiative, which is really designed to train cardiologists, and then ultimately general practitioners, in the treatment of aortic stenosis, and there's a big need for that. The American Heart Association is developing a section on their Web site to actually speak to patients with aortic stenosis. That's never been there in the past. Edwards has helped launch a new patient focused site called yournewheartvalve.com, which helps direct patients that are wondering what they might do about their aortic stenosis. So there are a number of things going on right now, Glenn, that I think will be helpful.

Okay, great. Thanks, Mike.

Sure.

Rick Wise, Stifel Nicolaus.

Hi, Mike. A couple of questions. Just a general one to start with. I know it can't be fun to cut guidance, (inaudible) guidance, for the US. Help us think through why you are confident that you have got the correct range now, given the understandable surprises as the new procedure gets rolled out and the complication around referrals and reimbursement, et cetera.

Yes. Thanks. You can imagine, when we have a very novel, innovative technology like this, there are so many variables that go into the rate of adoption, and we try hard to model that, and we've got a very talented group with an awful lot of feedback, and we're very close to our clinicians and our sites and do our best, but we're not able to get that just perfect. What we always try and do is share our best insight and our best knowledge, and we believe that what we're sharing right now is our most accurate picture of how we think the US is going to turn out in 2013. We're fortunate that we have got the first quarter under our belt so we know that, so I would imagine there would be less risk in it now than when we were making those estimates in December, so we're just that much more confident that this is the right level.

But when you think about it sequentially, Mike, and I don't know if it's the right way to think about it, let's assume clinical trial sales and net stocking are somewhat like the first quarter. It still seems like we should see -- the math could be something like 20% sequential growth in commercial sales. Is that too aggressive a thought, do you think?

In terms of what are the range of possibilities, it's fair that the range are large. Given the dynamics, what we remind ourselves, Rick, is that if each of the 200 centers that we started the quarter with just did one more case in the quarter, that would have resulted in $6 million more sales. And so we're very sensitive to slight changes in almost every variable. And so, yes, it's always possible that we do better than this, but we're sharing this guidance as what we think is the clearest picture, the way we see it today.

Just one last quick one. When does net stocking turn negative in 2013?

So far we've gotten in trouble trying to predict exactly what net stocking will do because there are so many variables. We think generally that it's a positive influence in the first half, and it turns negative in the second half. But again, it starts to be a smaller percentage of total, Rick, so I think it gets -- it starts diminishing as an important impact over time.

Thank you.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking the question. Mike, just to kind of follow along with Rick's question, just on the confidence with 2013, how should we -- I'm having a hard time reconciling entering the year having confidence in 2013, now we're taking some numbers down, but yet you guys are still very confident in the longer term outlook for the technology. I recognize that there's a very large prevalence perspective now in patients out there with aortic stenosis, but how do you think about that dynamic but then also considering the fact that there actually are constraints, as you mentioned, affecting this year, like economics which probably aren't going to get better, and then capacity constraints? So why not kind of change the outlook longer term unless you expect the economics or capacity issues to really flush out, which doesn't seem to be a likely scenario, at least (multiple speakers)?

Thanks, Kristen. Actually, maybe we have a little different view. We do think that economics improve, and we do think capacity improves over time. Here you have this disease that's just a devastating disease for these patients, and we're still early in the experience of these centers. They're on a learning curve. They're still building their capacity. They're far from efficient at this point and that's growing.

The economics, there's two components to the economics. One is the reimbursement, and admittedly that changes slowly, but I would imagine that there would be changes to improve that over time. But more importantly is the cost side of this and the cost side that's driven by things like length of stay, like the actual procedure intensity itself, its complications, all those are improving, which should improve the economics. So we think there's a number of factors that improve over time that are more difficult in the short term than they are in the long term.

Okay. And then just on the surgical valve business, can you just maybe give us what the underlying rate of growth was there in the US as well as outside the US?

Sure. Let me take a look. So the US underlying rate of growth was, I think, in the low to mid single digits, so sort of in the 3% to 5% range. As a growth rate.

Okay. Thank you.

Negative. I don't know if I said that, but that's what I wanted to make sure that you were clear. Sorry about that.

So US surgical valve business was down low to mid single digits?

That's correct.

And is that because of selling days, or you think just the overall market was softer, or competition?

Yes, there was one less sales day, which is worth about a minus two. So a component of that was sales days, Kristen. But the market wasn't particularly robust either, in our view. We don't feel like we took a share hit.

Okay. Thank you.

Michael Weinstein, JPMorgan.

Hi. Thank you for taking the questions. First question is a couple of clean-ups here. So our math, based on the numbers you gave, suggests that the number of centers in the US that were put -- that shifted to consignment this quarter was actually less than the number that shifted in the fourth quarter. Do you have that in front of you? Is that right?

I don't know that. I can tell you, Michael, that right now I think there's about half of the centers that are somewhere going through the consignment process, but I wouldn't be able to put my finger on it because this consignment number, once somebody starts on consignment, each valve they use moves to consignment, so it gets to be variable. It's not easy to do to back out the accounting. It's one unit at a time.

Okay. The surgical valve commentary conversation you just had with Kristen, what about the view or the thesis, Mike, that the launch of TA and the focus of surgeons in the US now on TA is taking them away from doing surgical valve cases and that you are seeing more cannibalization, at least early on, than what we saw in Europe?

Yes, it's possible that's the case. There's also some theory out there that there's an awful lot of valve trials going on in the US at this point as well that could be tapping off some volume. So those could be factors that are influencing the surgical valve growth. Again, our pricing is solid. We don't feel like we're losing share. It's just not generated much growth right now.

Two other quick ones. One question I got from a lot of people between the press release and the call was why didn't the Company pre-announce given the shortfall here on the top and bottom lines and the change to guidance? Why did you guys sit on this until tonight?

We feel like this was sort of within our -- within the norms of reporting the way we do right now, so we didn't feel like there was any need to pre-announce.

And then last one, given the quarter, given your lowered growth outlook for the year, given the obviously increased questions here from the Street, has your view on acquisitions changed at all, Mike, and your appetite for doing anything that might be a larger deal?

No, we're long-run guys, Mike, so when we think about acquisitions, we think about how we create long-term value, we think about the kind of things that suit Edwards. We have a very focused strategy around structural heart disease and critical care technologies, so any acquisitions we think about are those that would provide growth, particularly in those areas where we're leaders. So our philosophy overall has not changed.

But no bigger deals?

We don't particularly -- our history, Mike, is to look at technology deals. We always consider a full range of options, but I can't tell you that there's really been any change in our view.

Okay. Thanks for taking my questions.

Sure.

Amit Bhalla, Citigroup.

Hi, Mike. In your prepared comments you were talking a little bit about European competition impacting OUS TAVI. Can you flush that out a little bit more? To what extent did it impact numbers and how is it playing through in terms of pricing in the European market?

Sure. I would say for the first time we felt that the competitors in the non-transfemoral competitor, the non-transfemoral segment took some share. We estimate that maybe about -- it's maybe 10% of that alternate access position overall, so that's what it would look like. That's probably something in the order of maybe 150 units in the quarter. The bulk of those all in Germany.

Okay. Secondly, I know you talked about the 20 or so sites that have postponed procedures. I'm wondering in the US market, is there any dynamic of centers who were trained and performing procedures that have decided that transapical -- I'm sorry, that TAVI is no longer a procedure they want to offer because of economics or any other reason?

Yes, I'm not aware of anybody that has walked away and stopped doing TAVI based on economics. You asked the question earlier, too, about pricing in Europe. If I hadn't mentioned it earlier, it's continued on a similar trend to what we've seen in the past, about a 3% year-over-year decline, principally driven by the volume discounts that we give at large centers.

And, Mike, the question I asked, the second question, in terms of centers walking away, I meant for economics or any other reason, and I think you just answered it strictly on economics.

No, I didn't mean to say that I'm aware of any centers that have walked away from TAVI that I am aware of.

Thanks.

Brooks West, Piper Jaffray.

Hi, this is actually Misha Dinerman for Brooks West. Mike, in your opening comments you noted that the TA backlog has been addressed but it sounds like the TA sites are still postponed, so I was wondering if you could comment on that a little bit.

What I was trying to refer to is in advance of approval of cohort A, we believe that sites were more or less sort of saving up their patients that didn't have good femoral access for a transapical approach. Given that we got that approval in late October of last year, we don't think those patients are still around. We think those patients have been treated. This is not the kind of disease that, here we are, almost six months later that they would still be there. So the TA cases have gone very well. They've had a high procedural success rate. We actually wonder here whether some of the cases that had previously been done transfemorally, that were maybe borderline transfemoral cases now that there is TA approach actually are being done by TA.

Thank you.

Sure.

Ben Andrew, William Blair.

Just a quick question for you. If I missed it, forgive me but did you give the break out in revenues for TF versus TA in the quarter? I think you did last quarter.

I think I mentioned it in the US. In Europe, I think our mix has been running around 70% TF, 30% TAA. So I think the market might be slightly richer than that, but that's our mix at this point. What I said was that we had much more growth on the TF side and actually some decline on the TA side.

Okay. And then on the sales and marketing side, as you think about the progression through the year and you gave us some guidance on the percentages, but what would it take for you to think about those spending levels differently as you go through the year? Say you had another disappointing quarter on a trends basis like this in second quarter?

Yes, we try and discipline our sales and marketing expenses. You saw even our expenses this quarter are a little lower, probably because of some of the incentive comp that goes along and follows sales. But our focus is on really driving the growth. We think there's a lot of unmet need out there, and we try and really line up our resources to be focused on that, and then those that aren't focused on driving growth, we try and be very thoughtful and judicious about how we apply that. So the estimates that Tom offered of an SG&A rate of around 37% for the remainder of the year, we think is a pretty reasonable way to think about us in 2013.

Thanks.

Bruce Nudell, Credit Suisse.

Good afternoon. Thanks for taking my question. Mike and Tom, it looks like, based on that $350 million to $400 million guidance, and about $30 million-ish in clinical and zero in net stocking, it's working out to like $320 million to $370 million in guidance for US commercial sales. First, simple question, is that the right way to be thinking about it? And given the fact that it's probably going to take time to recruit the unreferred prevalence pool of patients, should we be thinking the 2014 PARTNER I opportunity is somewhere between $400 million and $500 million?

Yes, let me take a shot at your first question. In terms of what we're guiding to, that was everything that included clinical and net stocking. We don't know how net stocking is actually going to work out. It's not going to be a big number one way or another. So the difference probably between our estimate and what you are trying to calculate are the clinical sales, and if you just took the clinical sales this quarter and took them times four, it probably wouldn't be a bad estimate to use for how it might turn out for the year. I'm sure it's not perfect, but it's not a bad estimate. Does that answer that part of the question?

And the second question really was, given the work you are going to have to do to draw out the unreferred prevalence pool, should we be thinking about the 2014-ish market potential for PARTNER I in the $400 million to $500 million range if, in fact, this year's commercial sales are somewhere between $320 million and $370 million? And that's it.

We're not ready to forecast 2014, Bruce. The things that are going on right now, in addition to the work that I mentioned earlier, that we're doing with the societies and so forth, there's also work going on with each individual site. And those sites are probably the most powerful generators of improving their capacity, improving their economics, and working on their referral networks. So I expect there to be progress on all those fronts, but it's too early for us to offer 2014 guidance.

Thanks so much.

Sure.

Spencer Nam, Janney.

I wanted to ask you a couple of quick questions on the center behaviors, and then how you guys look at the outlook. First of all, you guys talked about 200 centers signed up as of last December, and then another 200 joining the program by end of next year, 2014. Would this sort of -- the recent activities, do you now have a different view on that, or how do you guys think about the [center] ramp-up here with the program?

Yes, no, we don't have a different view of that. As I mentioned at the end of this quarter, just over 225, so we're tracking just on that rate. But this is one that as we get more visibility, we'll let you know, but that estimate is our current reasonable estimate.

Okay. That's helpful. Then in terms of once the centers get trained and signed up, for example, what sort of ramp-up period do they have in terms of doing cases? It seems like the time it takes for a center from a consignment stance to fully functional, if you will, is taking a little longer than we had previously expected. Is that fair?

It's tough to generalize, Spencer. As you know, when they come to training, they bring some cases with them, and then generally they get proctored immediately thereafter. So usually something in the neighborhood of five cases usually happen in pretty short order after their training. And then generally because they place stocking orders, they have a certain level of commitment to continue. But it's highly variable for a whole host of reasons. So I'm not sure that I can provide much help on that.

Okay, thank you.

Danielle Antalffy, Leerink Swann.

Thanks so much. Thanks for taking the question. Mike, I was hoping you could follow up on a comment you made about reimbursement and potential improvements there, and help us understand what improvements you're talking about, and then when we could see that, number one. And then number two, I was hoping you could comment on the potential penetration into the moderate risk patient population, particularly after the GARY data we saw at ACC and how, if at all, that changes your view of potentially penetrating that patient population. Thanks.

Sure. Yes, I think that there's a couple of kinds of reimbursement. There's physician reimbursement, and that's going to get re-addressed. That happens routinely. That pretty much happens at an annual -- on an annual basis so that will get addressed. In terms of the overall DRG system, that tends to be slower moving. It takes some time. I think generally people think it takes a couple of years here before CMS reassesses a DRG, but over time, they try and reassess it. So these things aren't frozen in time, was my inference.

In terms of the GARY registry and whether it had impact, we really have not seen any negative impact. I think one of the things that I mentioned is actually in Germany itself is one of our fastest growing countries in Europe. It doesn't change our view of how attractive this is going to be for patients. If you look at the -- that have -- or patients that are current surgical patients. If you look at the three-year ACC data, which we think is far more important data than the GARY data, we found that comparing the SAPIEN valve to surgery was looking quite attractive. They were equivalent, and it becomes a very interesting option for these high-risk patients, so we think that PARTNER II, which is going to get into it in a bigger way, is going to demonstrate that even greater. The early look that you had in PARTNER IIb highlights the benefits of XT and the lower profile and the improved vascular complications. We think this just gets better for these moderate risk patients.

Okay. Thanks so much.

We have time for one final question. David Lewis, Morgan Stanley.

Good afternoon. Thanks for squeezing me in. Mike, one question, one financially related for Tom. The question I keep on getting during the calls that is going on is some of the dynamics you are talking about on the short term you don't get materially better in the next 6 to 12 months but you are also very confident that the total opportunity for SAPIEN remains unchanged. Is a fair way of thinking about this is it's the same total market opportunity but maybe you get to that level of penetration or that opportunity 6 months, 12 months, or 2 years later than you would have thought?

I was going give Tom a chance to answer a question here.

I got a second one for Tom.

He hasn't been very popular.

He has a second part for me.

To the first one, yes, that may well be the case. I hesitate to change a view of a market after one more quarter. As we see things unveil itself, David, we'll have a sharper view of what we think this looks like in the long term. But the premise that you lay out there that it may take a little longer to get these patients, that's one explanation that might be it. It's just too soon for us to have a clear view, and we'll certainly sharpen that up over time.

Okay. And then, Tom, I promised to give you a financial question here. If you think about the guidance, specifically on earnings, the call focused more on revenue. If I adjust for the top line, really THV sales, work it down at a high contribution, the earnings reduction kind of makes sense to me, but what made less sense was it looks like the way you're approaching the sales and spending this year is relatively similar adjusted for that revenue, and given Mike's commentary on seeing less traction at smaller centers, I was surprised that you're seeing that relative contribution to earnings. I'm wondering, has there been any change to sales and your spending expectations for '13 based on what you are seeing in the marketplace? If this were to continue into next quarter, do you think then we would start to see a change in how you're thinking about sales spending in the US?

It's a good question. We looked at expenses, and we looked hard, but what we tried to do very much is to make sure that everything and anything that was directed at sales growth was preserved. So we've done some things. You also have to remember that when we do something like this, the top and bottom line, we're talking sales growth adjustment and EPS adjustment, there's adjustment to the incentive programs inside the Company. So there's a piece of that, that might be misleading you when you are looking at ratios and so forth. So some of it is that. We're convinced that this is all the growth opportunity we've ever had, and it's just -- might have to work a little harder. So spending is probably not the place we would go short term.

Okay. Thank you very much.

Okay. Well, thanks, everyone. We appreciate your continued interest in Edwards. Tom and David and I welcome any additional questions by telephone. With that, back to you, David.

Thank for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during the call which include underlying growth rates, sales results excluding currency impacts and amounts adjusted for special items, are included in today's press release and can also be found in the Investor Relations section of our Web site at Edwards.com.

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